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Consumption Commitments and Employment Contracts, Second Version

27 Pages Posted: 20 Jan 2006  

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Larry Samuelson

Yale University - Department of Economics; Yale University - Cowles Foundation

Dan Silverman

University of Michigan at Ann Arbor - Economics Department; National Bureau of Economic Research (NBER)

Date Written: January 14, 2006

Abstract

We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.

Keywords: Unemployment, consumption commitments, optimal contracts

JEL Classification: D21, D31, D81, J34

Suggested Citation

Postlewaite, Andrew and Samuelson, Larry and Silverman, Dan, Consumption Commitments and Employment Contracts, Second Version (January 14, 2006). PIER Working Paper No. 06-002. Available at SSRN: https://ssrn.com/abstract=877314 or http://dx.doi.org/10.2139/ssrn.877314

Andrew Postlewaite (Contact Author)

University of Pennsylvania - Department of Economics ( email )

160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
United States
215-898-7350 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~apostlew

Larry Samuelson

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Dan Silverman

University of Michigan at Ann Arbor - Economics Department ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2447 (Phone)
734-764-2769 (Fax)

HOME PAGE: http://www.econ.lsa.umich.edu/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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